How Foreign Companies Lay Off Employees Legally in China? What Employers Need to Know

Business conditions change. Revenue declines. Projects are cancelled. Headquarters may decide to reduce headcount.

For a foreign company operating in China, however, a decision from global headquarters to “cut 20% of the workforce” does not automatically mean the China entity can terminate employees immediately.

China has specific legal requirements for employee termination and economic layoffs. For foreign business owners, understanding the difference between a normal termination, a negotiated termination, and an economic redundancy process is essential to avoiding costly labor disputes.

1. Start With the Legal Basis: When Can You Legally Lay Off Employees?

A common assumption among overseas management teams is:

“Our China business is no longer profitable, so we can reduce the workforce.”

The business reason may be genuine, but the company still needs to identify the appropriate legal basis and follow the required procedure.

Under Article 41 of China's Labor Contract Law, an employer may conduct an economic redundancy process in certain circumstances, including serious difficulties in production and business operations, major business restructuring, technological changes, or significant changes in the economic conditions underlying employment contracts.

However, Article 41 applies to a specific economic redundancy process. It should not be confused with every situation in which a company wants to reduce headcount.

This distinction is particularly important for foreign companies because a global restructuring plan may need to be adapted to the legal requirements applicable to the China entity.

2. When Does the Economic Redundancy Process Apply?

Under Article 41, the statutory economic redundancy procedure generally applies when an employer needs to reduce:

• 20 or more employees, or

• Fewer than 20 employees but at least 10% of the workforce.

The law also identifies specific circumstances in which such a redundancy process may be used, including serious difficulties in production and business operations and certain restructuring or major changes in business conditions.

For example:

Global Headquarters:

“Revenue in China has fallen significantly. We need to reduce 25 positions.”

China Management:

“Before we announce the layoffs, we need to review the legal basis, employee contracts, workforce numbers, consultation process and compensation.”

This is the point where a global HR strategy needs to be translated into a China-compliant employment process.

3. Choose the Correct Legal Route — China Is Not an “At-Will” System

One of the biggest misunderstandings for foreign business owners is assuming that China follows an employment model similar to “at-will employment” in the United States.

In China, an employer generally needs a legally recognized basis to terminate an employment contract.

For example, Article 40 allows termination in certain circumstances such as an employee's continued inability to perform the job after training or reassignment, or a major change in objective circumstances that makes the original employment contract impossible to perform and the parties cannot reach agreement on modification.

This means that a company should not simply tell an employee:

“The business is not doing well, so today is your last day.”

The company should first determine:

What is the legal basis for termination?

What procedure applies?

What compensation is required?

What documents and evidence should be prepared?

4. Decide Which Termination Route Applies

Before reducing headcount, a China HR team should identify which employment route is actually appropriate.

Option 1: Mutual Termination

The employer and employee agree to end the employment relationship.

This can sometimes provide a more predictable and efficient solution, but the agreement should be properly documented and compensation should be clearly addressed.

Option 2: Individual Termination

In certain circumstances, an employer may terminate an employee based on specific statutory grounds.

For example, Article 40 provides certain grounds for termination with advance written notice or payment of an additional month's salary in lieu of notice.

Option 3: Economic Redundancy

Where the statutory conditions for economic redundancy are met, the employer must follow the applicable procedure under Article 41.

These three situations should not be treated as interchangeable.

Choosing the wrong route can significantly increase the company's legal risk.

5. Follow the Required Layoff Procedure

For an economic redundancy under Article 41, the employer must provide advance explanation to the trade union or all employees, solicit their opinions, and report the redundancy plan to the relevant labor authorities.

The process therefore involves more than simply preparing termination letters.

A company may need to prepare and review:

• The business rationale for the workforce reduction

• Employee headcount and affected positions

• Employee selection criteria

• Labor contracts

• Seniority records

• Salary and compensation calculations

• Consultation materials

• Written redundancy plans

• Employee communications

• Supporting business documents

For multinational companies, this is particularly important because the decision may originate from a global headquarters while the legal employer is the China subsidiary.

A global restructuring decision does not replace the China employment procedure.

6. Check Local Reporting Requirements: Shanghai’s 2026 Update

Foreign companies operating in Shanghai should pay particular attention to a recent local policy development.

On July 21, 2026, the Shanghai Municipal Human Resources and Social Security Bureau issued a revised notice concerning reporting requirements for legally implemented workforce reductions. The new notice took effect on August 16, 2026 and will remain effective until August 15, 2031.

Importantly, the Shanghai municipal HR authority's designated scope includes foreign-invested enterprises established in Shanghai with registered capital of USD 10 million or more, among other specified enterprises. Other enterprises fall within the relevant district-level HR authority's scope.

The notice also specifies documentation that may be required when reporting a redundancy plan, including:

• The company's business license

• Trade union or employee representative documentation

• Employee representative information

• The written redundancy plan

• Information regarding the reasons for the layoffs

• Materials showing that the company explained the situation and solicited opinions

• Information concerning compensation arrangements and remedial measures

The notice states that at least 30 days should elapse from explaining the situation to the trade union or employee representatives to submitting the report to the HR authority.

For foreign companies in Shanghai planning a significant workforce reduction, this is a practical compliance point worth checking before launching the process.

7. Calculate Severance Correctly

Economic redundancy under Article 41 generally triggers statutory economic compensation.

Under Article 46, employees covered by Article 41's statutory redundancy provision are entitled to economic compensation.

Under Article 47, economic compensation is generally calculated based on the employee's years of service:

One month's salary for each full year of employment.

For periods of six months or more but less than one year, one year is generally counted. For periods of less than six months, half a month's salary is generally payable.

There are also statutory rules concerning the calculation of monthly salary and limits for employees with particularly high salaries.

For a foreign company, therefore, “severance” should not be estimated simply by multiplying the employee's current monthly salary by the number of years worked.

The HR team should review the employee's actual compensation history and the applicable statutory calculation rules.

8. What If the Layoff Is Unlawful?

This is where the financial risk can become significant.

If an employer unlawfully terminates an employment contract, Article 87 provides for compensation at twice the statutory economic compensation standard.

For example, a company that believes it is conducting a straightforward restructuring may instead face a dispute over:

• Whether the termination had a valid legal basis

• Whether the correct procedure was followed

• Whether the employee selection process was lawful

• Whether the consultation requirements were fulfilled

• Whether severance was correctly calculated

• Whether the company provided appropriate documentation

The cost is therefore not limited to the original severance payment.

A poorly managed termination can result in additional compensation, legal costs, management time and disruption to the company's China operations.

9. A Step-by-Step Pre-Layoff Compliance Check

Before headquarters instructs the China team to announce a workforce reduction, we recommend conducting a China-specific HR compliance review.

A practical pre-layoff review:

Step 1 — Review the business reason

Document why the company needs to reduce its workforce.

Step 2 — Review the employment structure

Identify the legal employer of each affected employee and review the relevant employment contracts.

Step 3 — Determine the legal route

Assess whether the situation involves:

• Mutual termination

• Individual statutory termination

• Economic redundancy

• Another legally recognized termination scenario

Step 4 — Review employee eligibility and selection

Check whether employees who may have special statutory protection are affected and whether the proposed selection criteria are defensible.

Step 5 — Calculate compensation

Review salary, seniority and applicable statutory compensation rules.

Step 6 — Prepare the procedure

Prepare consultation materials, employee communications, redundancy plans and required reports.

Step 7 — Complete the termination properly

Issue the required documents, settle outstanding salary and compensation, and complete relevant HR procedures.

Final Takeaway: How to Lay Off Employees Legally in China

For a foreign company, a global decision such as “reduce headcount by 20%” is a business decision.

But implementing that decision in China is also a legal and HR compliance process.

The safest approach is not to wait until employees receive termination notices.

Before announcing a workforce reduction, foreign employers should review the legal basis, employee contracts, selection criteria, compensation, consultation requirements and local reporting obligations.

In China, a successful restructuring is not simply about reducing headcount. It is about reducing risk while restructuring the business.

How ExpertinChina Can Help

As a professional platform operated by Gomax Group, ExpertinChina specializes in helping international companies build a secure and compliant employment presence in China.

Our Core EOR and HR Compliance Services Include:

• Legal Employer Structure: Acting as the local employer of record, enabling you to hire in China without immediate entity setup.

• Labor Contract Management: Issuing and managing PRC-compliant labor contracts.

• Payroll Administration: Running monthly salary processing, individual income tax withholding, and maintaining payroll records.

• Statutory Benefits Handling: Managing social insurance and housing fund contributions in compliance with local regulations.

• Foreign Worker Support: Coordinating work permit and residence permit applications for foreign hires.

• Offboarding Management: Supporting compliant termination, final pay processing, and employee record closure.

• Data Compliance Guidance: Helping design payroll and HR data handling procedures that align with the Personal Information Protection Law.

This article is provided for general informational purposes only and does not constitute legal advice. Employment and redundancy requirements may vary depending on the employee's circumstances and local regulations. Foreign employers should obtain China-specific professional advice before implementing a workforce reduction.

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